Alliances Love at First Byte

By THOMAS McCARROLL

From opposite ends of the U.S., they carried on the computer industry's fiercest rivalry. Based in suburban New York, International Business Machines has long looked down on Apple Computer, dismissing it as a ragtag bunch of rabble-rousers. Miles away, in both distance and culture, Silicon Valley-based Apple (1990 revenues: $5.6 billion) attacked IBM ($69 billion) as an impersonal bureaucracy, mocking the company in TV ads as Big Brother and depicting its customers as lemmings. The warring companies forced computer users to choose sides, sometimes dividing family members against one another. Those wanting easy-to-use, almost organic software favored Apple, while others threw their lot behind IBM because its PCs were backed by a wider assortment of programs.

But in a rapidly changing industry, IBM and Apple have found much in common lately. After years of dominating their own spheres of influence, they now face similar woes: declining market share, relentless low-cost competitors and rapidly aging technology. While IBM and Apple remain the biggest players, with a combined market share of 38%, their rivalry has lost its potency, as brand loyalty has given way to price competition. Today IBM and Apple are more like a pair of aging prizefighters whose bout gets second billing.

The two companies decided last week to put away their boxing gloves. IBM and Apple plan to join forces and share technology in a potentially powerful partnership that could reshape the computer industry. The culmination of weeks of cross-country negotiations, the collaboration could help plug large gaps in their product lines and position both companies for the future. Among the elements:

-- The two companies will form a joint venture to develop an advanced operating system, the basic controlling software of computers, which IBM and Apple will use in their machines and sell to other companies.

-- Apple's user-friendly Macintosh system will be integrated into IBM's product line, including the large computers that serve as the heart of corporate systems.

-- Apple will gain access to IBM's advanced, high-speed microprocessors, which will be incorporated into future editions of the Macintosh and other machines.

-- The two computer makers will seek to develop a new generation of high- powered, multimedia hardware and software, which could be marketed under both brand names.

The deal represents a major realignment in the PC industry. "Who would have thought these two companies could possibly see eye to eye on anything? It's like a surfer girl marrying a banker," declared Richard Shaffer, publisher of ComputerLetter. If the venture is successful, adds Shaffer, "it could create the most fearsome force in computing ever." Machines made by the two companies could become virtual look-alikes, which would not only eliminate the need for consumers to choose sides but also end much of the confusion prevalent in the industry over the lack of standards.

None of this would have been thinkable a decade ago. Apple founders Steven Jobs and Stephen Wozniak were riding high on the widespread acceptance of their best seller, the Apple IIe, when IBM launched its PC in 1981. While it was bulky, expensive ($2,600, vs. $1,395 for the Apple machine) and difficult to use, the PC was quickly adopted as the industry standard because IBM had a lock on the Big Business market. Apple eventually sold nearly 3 million of its IIe's, mainly for school and home use, but the company was largely shunned by corporations.

When Apple unveiled the revolutionary Macintosh in 1984, the rivalry with IBM reached full boil. Taking on Big Blue had become an obsession for the Silicon Valley boys, who called themselves "Bluebusters." Jobs launched Macintosh with an evangelistic zeal, exhorting an auditorium packed with dealers, customers and employees, "IBM wants it all and is aiming its guns on its last obstacle to industry control, Apple. Will Big Blue dominate the entire computer industry . . .? Was George Orwell right?" As the frenzied crowd shouted a chorus of "No!," Jobs cued a now notorious TV commercial known as "1984," which was to run only once, during the Super Bowl. The ad showed workers staring zombie-like at a Big Brother on a viewing screen, which a heroic female athlete smashed with a sledgehammer.

Offering stunning graphics and a stylish design, the Macintosh caught on well in the home and school markets, where Apple's machines now outsell IBM's by a two-to-one margin. Big Blue has always been frustrated in those markets. In the mid-'80s, IBM offered the PCjr, a stripped-down version of its best seller, but the machine flopped because it couldn't operate many of the heavy- duty software programs designed for the PC. Yet IBM has virtually locked Apple out of the office market, mainly because IBM's operating software has been adopted for 90% of the PCs now in operation. Apple has never been able to match its rival's marketing clout either. The California company's sales force is about a tenth the size of IBM's.

Lately, changes in industry taste have reduced the relevance of the IBM- Apple rivalry. Rather than choose sides, customers now insist that computers work together in networks, regardless of the make or model. That has harmed Apple, since its operating software is not the most compatible. But it has been no blessing for IBM either, because its operating system is so common that customers often prefer to buy clone machines that work like IBM's but cost less. Customers have become more concerned about price than brand names or even high performance. That has turned things upside down for IBM and Apple, which find themselves struggling to make their products less distinctive and more compatible with their other rivals. Apple has developed desktop computers that not only run its Macintosh software system but also use the same disk operating system -- or DOS -- used by IBM models. And Big Blue has countered with desktop computers that are more user friendly, in the spirit of Macintosh.

Yet neither IBM nor Apple has been able to halt customer defections. IBM's market share in PCs has dropped by half, to 23%, while Apple's has declined to 15%, from 18%. The changing marketplace has forced both companies to make some painful adjustments. In the largest layoff in the company's history, Apple will pare 1,500 jobs from its payroll this summer, a reduction of about 10%. The company is expected to post an earnings decline for the past quarter, largely because of price cutting. IBM, which during the January-March period reported the first quarterly loss in its 80-year history, plans to reduce its labor force by some 14,000 workers this year, a 4% cut.

Another problem that drove IBM and Apple into each other's arms is their growing friction with some powerful partners, most notably Microsoft, the suburban Seattle software giant run by wunderkind billionaire William Gates III. Microsoft was the creator of MS-DOS, the software that runs the IBM PC, but the two companies have had a falling out over the next generation, called OS/2, which runs IBM's line of PS/2 computers. Microsoft developed OS/2 as well, but IBM believes the software company has undermined sales of that software by pushing a highly successful program called Windows 3.0, which enables old MS-DOS software to work much like a Macintosh. That has also alienated Apple, which contends that Microsoft stole elements of Windows from Macintosh programs. The new IBM-Apple venture, which will develop its own software, could spell the end of OS/2 and any remaining relationship with Microsoft. "We're flabbergasted," says Steven Ballmer, Microsoft's senior vice president. "This does not bode well for future cooperation between IBM and Microsoft."

The new alliance scorns another powerful company, Intel, which has supplied the microprocessors for IBM's machines and has commanded an almost monopoly position as a maker of IBM-compatible chips. Possibly to foster more competition, the new partnership says it will buy advanced processors from Illinois-based Motorola, whose chip business has been suffering lately because some of its big customers, including Unisys, have been in decline. IBM has been busy lining up other partnerships as well. Only a day after announcing its deal with Apple, IBM said it would join forces with Germany's Siemens A.G. to produce a powerful new 16-megabit memory chip, which will hold four times as much data as current models. The collaboration could give IBM-Siemens a leg up in the race against Japanese companies to bring the new chip to market.

The IBM-Apple combination has its risks. Most PC joint ventures have foundered, and this one will have to stand the test of vastly differing corporate cultures. Consumers could be disillusioned with both companies at first, viewing Apple as selling out and IBM as consorting with free spirits from the West Coast. But if the collaboration works as well in practice as it is planned on paper, the biggest winners will be the customers. Consumers will no longer have to worry about divided loyalties and incompatible programs. They won't be in Apple's orbit or IBM's, but in the best of both computer worlds.